Across the Aisle from David Neeleman on Azul’s Skycouches, US Partner Opportunities, and More (Part 2)

In part 1 of my discussion with Azul’s David Neeleman, I had him focus on why this was going to work when the odds seemed stacked against the airline. In this part, we dive into the airline’s product, partnering, and aircraft decisions.

The A330s that are flying today do not look like the airline wants. Starting next year, they’ll go in for a complete redo on the inside. What comes out will include flat beds and Skycouches in coach (from Air New Zealand but better because it has 4 seats instead of 3). Let’s dive back in.

Planeline

Cranky: Can you talk about the multi-cabin product decision? How did you arrive at that?

David: It was a tough fight. It’s all around geometry; it’s real estate. A business class lay flat seat takes up 2.5 times a coach seat. Do the math. What’s my average coach [fare] versus my average business class? We had one faction in the company that was pushing lower density with more lay flat seats. But in order to do that you have to be confident you can sell that for $5,000 roundtrip. Another faction said, we get $1,000 [coach] fares, we can sell as many as we need to. So we kind of compromised. It may not seem the like best from a commonality point of view. We have 7 A330s and some will have 274 seats with 24 lay flat business class seats. Then the two planes that are going to New York will have 35 lay flat business class seats and a total of 246 seats. We’re just trying to cater to the market.

Cranky: Sounds like an expensive way to do it.

David: Not really. The planes are really reliable. The other thing we have on the high density airplane, we have 17 Skycouches so you pick 4 seats together and it folds up and makes a bed. So if ever we got into a challenge where we were full in business to New York and we had to go with a high density airplane, we’d have 40 extra seats that we could give to everyone.

Planeline

Cranky: Where does this go? How big is this opportunity in the US?

David: I think there’s a lot of West Coast demand. We have the range to do that, be it LA or Las Vegas or in that area. There’s also big demand for Europe. I think the thing I really like the best is we got these A330s for a great price. Even with the reconfiguration that we start in March and have them brand new on the inside, the cost is about the same as [an Embraer 190] costs us. So they’re very inexpensive. So when the A350s come on in 2017, those are higher capital costs, lower operating costs, and have 60 more seats. Those babies will fly like crazy. They’ll go back and forth to Florida and New York. Then the others, we’ll be able to explore… Caribbean, Cancun, West Coast, Europe. We don’t have to do daily service. We’ll just play with them. Even if we sat them on the ground and did nothing, it wouldn’t really affect us from a total cost point of view in a company that’s doing $4 billion in sales.

Planeline

Cranky: How much of your plan relies on feed from the US side?

David: Well… feed on the US side, we don’t really need it right now. We’re full and it’s doing great. It’s always nice to have feed. United is talking to us. A lot of airlines need feed in Brazil, especially the Star [Alliance] guys. Obviously a logical one would be JetBlue. We’ll have those conversations as time goes on. We have a lot to get done. We did all this in 9 months, so we put it together quickly. It wasn’t timed to go get feed arrangements because we didn’t really need it. We’ll get some on [the US] side, but it’ll just be frosting on our cake.

Cranky: Are you open to codesharing and alliances?

David: Yeah, sure. As long as it makes sense for us. It’s not going to be a big expense. We’re not going to change reservation systems to do it or anything like that.

Planeline

Cranky: Tell me a little bit about the A320s you’ve got coming in here. Your niche has been a lot of connecting cities that didn’t have service, as you’ve talked about. Taking people off buses. The A320 has a lot more seats, and it’s a lot more expensive airplane. I assume this is for connecting bigger cities to bigger cities, so how does that fit with the overall plan?

David: We took our route system today and we have 140 airplanes flying. Based on the economics of the neo — this is important because we talked about the fuel prices in Brazil — we just said, based on our operating costs today, if we just stuck a 320 on the route, which routes would do better with the bigger airplane? We did the math, particularly on the neo side, because the neo burns the same amount of fuel as the [Embraer] 195 does. So the trip cost on a 2.5 to 3 hour flight is about the same on a neo as it is on an [Embraer] 195.

Cranky: So this is more about upgauging the existing network as opposed to entering new bigger markets.

David: Yeah. So we have about 30 planes. The first 30 we get are just going to replace those and take the Embraers and put them in other cities. Take out the ATRs and put jets on those. Then take the ATRs and open up new cities. There are about 50 cities we could open up if we had the airplanes. It’s kind of like a trickle down. We’ll put the neos on the thickest routes and we need the seats for our frequent flier program. We need it for cargo, for our package division. We need it to be able to offer lower-priced seats. An Embraer is great for an hour, hour and a half, two hours. But when you start getting to 3 hours, it gets tougher to compete, especially to vacation destinations where people are price-sensitive. You gotta get such a high fare that it doesn’t make sense.

Planeline

Cranky: It’s not inconceivable that you’ll be the largest airline in Brazil in the not-too-distant future.

David: No, I think so. I think we have foundations built. Our competitors are talking about trying to get into the regional market, but the TRIP acquisition gave us like a 4-year head start. We had 3 years, and then it would take for someone to duplicate what we’re doing… it’s like having a Wal-Mart in a city. It just doesn’t make any sense to have another carrier in there. So we dominate all these cities. It’s really hard to shoot your way in especially when we have the connectivity already. From a revenue standpoint, we’re about 26 percent of the market today compared to 31 and 33 for Gol and TAM so we’re not that far away from that now even without adding the neos and the international stuff.

Cranky: I know you’re busy with all the festivities today, so I’ll let you go. Congrats on the launch of service here.

David: Super. Thanks Brett. Keep up the good work.

Planeline

[Read Part 1 – Across the Aisle From David Neeleman on Why Azul’s New Service to the US is Going to Work]

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12 Responses to Across the Aisle from David Neeleman on Azul’s Skycouches, US Partner Opportunities, and More (Part 2)

  1. David SF eastbay says:

    Interesting question, would JetBlue want to do a tie in with Azul?

    • CF says:

      David SF – Well, JetBlue has been open to anyone and everyone historically. I don’t imagine this would change anything even if there has been some bad blood out there. I would think that JetBlue would still treat it as a business opportunity just like it has with the other carriers it interlines with.

  2. I’d be interested if there were any antitrust concerns in Brazil, given how quickly they’ve grown and dominated. They’ve obviously cleared a review process with the merger of TRIP, but it seems like there might be some issues.

    The perhaps could argue the “natural monopoly” but I’d be curious how that goes.

    • CF says:

      Nick – Good question. Clearly David doesn’t think there is because he was more than happy to point out how they dominate some of these cities. But I would think the time for antitrust concerns would have been when the TRIP merger was pending. That went through so I guess the government is comfortable.

  3. PF says:

    Who accompanied Mr. Neeleman for the interview?

  4. So Cranky, your comment on Azul and Jetblue partnering and the historical bad blood between Neeleman and Jetblue led me to thinking: How is Azul operationally? Do you think Neeleman has learned that operations isn’t his bailiwick and is willing to defer decisions to folks who will properly handle operations?

    Also, I’m curious how much longer Neelman will be with Azul. He’s a startup guy moreso than a management operations guy. He didn’t fit into Southwest after they bought Morris Air and he got skewered for operational problems at JetBlue. Is there another country with an undeveloped air travel system that is at the cusp of massive growth with the right stimulation?

    • D-ROCK says:

      One thing about Neeleman that led him to Brazil…He was born there, and by birthright had Brazilian citizenship, which helped him to cut a great amount of the beaurocratic red tape and actually run an airline in another country. He may not be able to replicate it in another country without citizenship. Also, after Morris Air, he was part of the group started up WestJet before going to JetBlue. Yes he’s a startup guy and had some issues that led to his demise at JetBlue.

      However, for some reason I get a feeling that he is handing the situation a bit differently at Azul than at his previous stops (diversity of fleets, smaller markets, connecting traffic, long haul operations, etc.). Plus, honestly, RIGHT NOW, who is going to run Neeleman off. There’s strong possibility of an IPO for the company coming up, I would be he still keeps a large portion of shares and those that surround him seem to be completely comfortable with the decisions he’s made so far and who he is.

    • CF says:

      Nick – Good questions, and I don’t really know a ton of answers. Operationally, Azul seems to be ok. The November report from Flightstats shows 97.8% completion factor with 87.6% on time. So that’s pretty good. Then again… no snow to deal with down there.

      As D-ROCK says, Brazil is a special place because that’s where David is from. I think he’ll probably stick around for some time since he still sees a bunch of growth opportunities. Whether that works for the airline or ruins it remains to be seen.

  5. Bill says:

    Boy, this guy sounds like a douche. Both parts were an interesting read, but part 2 sounds like the words of a man who can do no wrong. We don’t need any feed from the US. “We dominate” all these Brazilian cities. Competition from other airlines “just doesn’t make any sense.” “Even if we sat [Airbus widebodies] on the ground and did nothing, it wouldn’t really affect us” because we make so much money.

    I’m no airline executive or expert, but I do know the business is cyclical and comeuppance can be brutal. Good luck to Neeleman and Azul!

    • FlyBirdsFly says:

      Before working in the industry I was on a B6 flight in their early days. A non-uniformed gentleman walked down the aisle and asked each row of passengers how their experience was and if they needed anything to make their flight more enjoyable. When he got to me, I asked him who he was and he introduced himself as David who worked at JetBlue. It was Neelman. A sincere, nice guy wanting to ensure his guests were happy and comfortable. Furthest thing from a douche.. And the furthest thing from the many suit-wearing CEO’s out there blowing to Wall Street.

  6. XJT DX says:

    I’ll never understand why there’s so much animosity towards Neeleman. Of all the people currently running an airline, he’s the closest thing to an aviation geek there is besides Branson. If other executives were as passionate about what their airline could be as opposed to maximizing profit… well a guy can dream right?

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